Glossaire

Balance sheet hedging is a hedging programme designed to protect the value of a company's foreign currency-denominated assets and liabilities from exchange rate fluctuations, with the specific aim of minimising accounting FX gains and losses on the financial statements.

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Why it matters

For any company that holds monetary items in foreign currencies — receivables, payables, intercompany loans, or cash balances — exchange rate movements between the transaction date and the settlement date create what accountants call accounting exposure, also known as translation exposure. When rates move unfavourably, these positions generate FX losses that flow directly through the profit and loss (P&L) statement, even if the underlying commercial activity is perfectly sound. Balance sheet hedging exists to reduce this effect, giving finance teams cleaner, more predictable financial statements.

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How it works

At the end of each accounting period, a company identifies its net open FX-denominated positions — typically by currency pair — and places offsetting forward contracts or other instruments to lock in the exchange rate on those positions. When rates move, gains or losses on the hedge offset the revaluation effect on the underlying balance sheet items, resulting in a significantly reduced net P&L impact.

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It is important to understand what balance sheet hedging does not do. Because accounting exposure arises after a transaction has already been priced and recorded, this programme does not protect a company's commercial profit margins from currency risk. That is the role of economic or budget-rate hedging. A well-designed FX risk management strategy typically combines both: budget hedging to safeguard margins at the point of pricing, and balance sheet hedging to keep the financial statements free of FX noise.

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Combining balance sheet hedging with other programmes

In practice, companies rarely run balance sheet hedging in isolation. It works best when combined alongside budget hedging programmes — whether static, rolling, or layered — and programmes that hedge firm commitments. The goal is a coherent, end-to-end approach to currency risk that addresses exposure at every stage of the commercial cycle: from the moment a price is set, through to settlement.

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Currency Management Automation makes this combination significantly more manageable. Rather than running each programme manually, companies can automate the identification of open positions, the execution of hedges, and the reconciliation of results — reducing both operational risk and the burden on treasury teams. You can read more about how these programmes interact in our deep-dive on balance sheet hedging strategy in currency management.

• Explore how to reduce FX gains and losses with Currency Management Automation.
• Learn how Kantox Dynamic Hedging® supports automated hedging programmes across the full commercial cycle.